OECD Seminar : „20 years after” Panel 2 : Challenges and opportunities
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Transcript of OECD Seminar : „20 years after” Panel 2 : Challenges and opportunities
OECD Seminar : „20 years after”
Panel 2 : Challenges and opportunities
Júlia KirályDeputy Governor, Magyar Nemzeti
Bank
„This time it was not us”
• The epicentre of the crisis was not in emerging markets
• It was originating from developed countries …– Macro imbalances (low interest rates, excess liquidity,
housing market boom, saving imbalance...)– Financial market imbalances (yield hunting and greedy
risk appetite, originate-to-distribute model and subprime lending, „toxic assets”: highly leveraged, structured products, high leverage, shadow banking system...)
• …and spreading towards East through trade and financial markets
• Strong financial and trade integration in the CEE region incl. Hungary has led to fast spill-over of the crisis
Strong financial and economic integration of the CEE countries
Source: EKB, Eurostat.
0
10
20
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40
50
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70
80
90
0 10 20 30 40 50 60 70 80
Exp
ort/
GD
P
Banking sector's foreign liabilities/ GDP %
%
Estonia
Latvia
Litvania
Slovakia
Hungary
Bulgaria
Czech Rep.
Romania
Poland
Level of foreign trade and financial integration in the countries of the region (2008)
Hungary’s high vulnerability triggered an avalanche
Integrated banking system with developed
countries
Overoptimistic expectations of the
households
„Fiscal alcoholism”
High inflation
Large public debt
Lending in foreign currency
Liberalised balance of capital
Exte
rnal d
ebt
High HUF yields
2. Banking sector risk
1. Government risk
150% loan to deposit ratio
Private sector is responsible for 2/3 of the external debt
Source: MNB.
Net external debt as a percentage of GDP
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10
20
30
40
50
60
70
2002
Q1
Q2
Q3
Q4
2003
Q1
Q2
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2004
Q1
Q2
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Q4
2005
Q1
Q2
Q3
Q4
2006
Q1
Q2
Q3
Q4
2007
Q1
Q2
Q3
Q4
2008
Q1
Q2
Q3
Q4
2009
Q1
Q2
%
0
10
20
30
40
50
60
70%
Banking sector Corporate sector General government Net external debt
The currency mismatch of the private sector amounts to 40% of the GDP
Source: MNB.
Open FX position of the main sectors as a percentage of GDP
-10
0
10
20
30
40
50
60
70
2000
Q1
Q2
Q3
Q4
2001
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2002
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2003
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2004
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2005
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2006
Q1
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2007
Q1
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Q4
2008
Q1
Q2
Q3
Q4
2009
Q1
Q2
%
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0
10
20
30
40
50
60
70%
Household sector Corporate sector General government Non-residents Net external debt
9th October 2008
– the fx swap interbank market collapsed– the secondary government paper market collapsed– the HUF depreciated hour by hour– the stock exchange trade was suspended because of
the price fall
Response to the crisis
• Immediate remedies for the liquidity crisis: – MNB: extended collaterals, LOLR in FX!, decreased reserve
requirement
– Foreign parent banks: replacing money market funds
• Fixing balance sheets:– Government: a sizeable and structural fiscal adjustment - pro-
cyclical effects (cut in social transfers, tax reshuffling: VAT and real estate tax↑, taxes on labor↓)
– Households: increase net saving position, decrease credit demand
– Companies: labor market adjustment, postponing investments
– Banks: deleverage, decrease L/D ratio and tighten credit conditions
• Monetary policy: focus on price stability AND financial stability (forced tightening, slow easing)
Hungarian banks withstand the shock
• Loan loss ratio is expected to triple in 2009 and slightly increase in 2010, while in the stress scenario it would be 5-6 times higher in 2010 than in 2008
• Strong capital position is expected to be kept along the baseline scenario (end-2010 CAR above 11%)
• Recapitalisation needs (EUR 400-600 million for the whole banking system) under a severe stress scenario are manageable
Consolidated loan los rates in the baseline and stress scenario
1.0
3.13.6 3.4
5.6
0.9
0
1
2
3
4
5
6Bas
elin
esc
enar
io
Bas
elin
esc
enar
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Stre
sssc
enar
io
Stre
sssc
enar
io
2007 2008 2009 2010 2009 2010
0
1
2
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4
5
6%%
Source: MNB.
Fast adjustment in the private and banking sector
Source: MNB.
Net financing position of the private sector and the loan-to-deposit ratio of the banking sector
120
130
140
150
160
170
120
130
140
150
160
170
The loan-to-deposit ratio (exchange rate adjusted)
% %
-10-8-6-4-2024
Mar
-06 Jun- 06 Sep- 06
Dec
-06 Mar
-07 Jun- 07 Sep- 07
Dec
-07 Mar
-08 Jun- 08 Sep- 08
Dec
-08 Mar
-09 Jun- 09
-10-8-6-4-2024
The net financing position of the private sector as a percentage of GDP HUF bn
Necessary adjustment can lead to deeper recession and slower recovery
Source: Eurostat, EC.
-25
-20
-15
-10
-5
0
5
10
151q
-00
3q-0
0
1q-0
1
3q-0
1
1q-0
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3q-0
2
1q-0
3
3q-0
3
1q-0
4
3q-0
4
1q-0
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3q-0
5
1q-0
6
3q-0
6
1q-0
7
3q-0
7
1q-0
8
3q-0
8
1q-0
9
3q-0
9
1q-1
0
3q-1
0
1q-1
1
3q-1
1
%
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-15
-10
-5
0
5
10
15
%
BG CZ HU PL RO SK CY MT SI EE LT LV
Red lines: Baltic countriesBlue lines: Central EU. countriesGreen lines: Mediterranean countries
EC forecast
GDP growth rates in new EU countries
The potential output can be negatively affected by the crisis
• Productivity (TFP):
– Financing constraints disrupt daily operations
– Expenditure on innovation falls
– Sluggish reallocation between industries
• Labour input:
– Long-term unemployment erodes human capital
• Capital input:
– Capital accumulation slows down
– Excess capacities are scrapped
• But two country-specific factors reduce these negative effects:
– High risk premia fall with fiscal consolidation
– Government measures boost labor market participation
Financial crises reduce potential growthalthough their long-term impact varies:
Lower long-run potential growth rate (Japan)?
Full recovery in levels (Sweden)?
One-time loss in output level (Finland)?
Source: Impact of the current economic and financial crisis on potential output, European Economy, Occasional Papers No 49
IMF estimations– Growth regression– Potential growth is 0.6-
2.5 pp lower after the crisis
– Hungary is mostly affected through its debt burden
Source: IMF Regional Outlook Europe, October 2009, Box 5
MNB re-evaluated its projections in August
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620
00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Contrib
utio
n to p
ote
ntia
l gro
wth
(per
centa
ge p
oin
t)
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0
1
2
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4
5
6
Annual ch
ange (p
er cent)
TFP Labour Capital Potential growth rate (right scale)
Potential growth and its components in Hungary
Source: MNB.
…but Hungary with lower post-crisis potential output growth is not an
exception in CEEEuropean Commission estimations for the CEE region
– Potential growth slows to 2-2.5 per cent– No recovery to pre-crisis growth rates (contrary to the euro area)
Note: calculations for the EU-8 aggregate (BG, CZ, EE, LT, LV, PL, RO)
Source: Impact of the current economic and financial crisis on potential output, European Economy, Occasional Papers No 49
MAIN LESSON FOR US:THERE IS NO FREE LUNCH!
NEVER SUPPORT UNSUSTAINABLE EQUILIBRIUM!